Burns: Two worlds of spending are on a collision course

ADVICE: PERSONAL FINANCE

SCOTT BURNS, Universal Press Syndicate

Published 5:30 am, Wednesday, May 17, 2006

One small set of tables among all the Social Security and Medicare trustees' report documents tells us two worlds will collide much sooner than expected. They are the world of U.S. government operations and the related, but separate, world of Social Security and Medicare.

The Social Security trustees' report tells us that revenues will "fall below program costs in 2017" (the same estimate as last year). It also tells us that the trust fund will be exhausted in 2040, a year earlier than estimated last year. But the collision will happen much earlier. How do I know?

The trustees tell us in a relatively obscure document. You can read it for yourself by going to the page that offers the actual report (http://ssa.gov/OACT/TR/TR06). Then click on "Supplemental Single-Year Tables." When you do that, you'll see a list of 19 tables. The one to look at is next to last, table VI.F9, "OASDI and HI Annual Income Excluding Interest, Cost and Balance in Current Dollars."

The table shows the estimated cash flow of the
Old Age Security
and Disability Income programs (Social Security), the estimated cash flow of the Hospital Insurance program (Medicare), and the combination of both. Basically, it measures the employment tax revenue coming in and the benefit payments going out.

The table excludes interest on the program trust funds, no minor matter. The interest on the Social Security trust fund for 2006 is estimated at a cool $100 billion, a credit that will take the fabled trust fund up to $2 trillion in U.S. Treasury securities.

Unfortunately, U.S. Treasury securities aren't quite the same as cash. To get the money, Social Security will have to redeem its securities at the U.S. Treasury. When they need to do that, the Treasury will need to get the cash, which it usually does by selling new bonds to the public. The alternative is to have Congress increase taxes. Since few want higher taxes and there is already worry about borrowing $400 billion a year, cash flow is important.

Free lunch will end

So what does table VI.F9 tell us?

It tells us that the surplus cash from the employment tax — the same cash that has been used to cover excessive government spending for a quarter-century — will be gone by 2015. That's when the combined costs of Social Security and Medicare will exceed revenue by $18 billion. After that, the long free lunch Washington has enjoyed will be over: To pay promised Social Security and Medicare benefits, it will be necessary to tap general tax revenues.

In other words, Social Security and Medicare will be in direct competition with defense and every other operation of government. More important, the conflict will escalate quickly. By 2024 the estimated combined shortfall will be $467 billion. By themselves, in other words, Social Security and Medicare will be as cash short in 2024 as the entire federal government is today.

Needless to say, lenders in China, Japan, India and the Middle East may look dimly on yet more borrowing.

This isn't the worst-case scenario, either. It's the "intermediate" case. The trustees have a more difficult projection of the future that assumes longer life expectancies, earlier retirements, etc. Called the "high cost" estimate, it is part of table VI.F9.

It tells us that Social Security and Medicare will have more expenses than tax revenue in 2010. That's less than four years from today.

Direct competition ahead

Does this mean we are less than four years away from Social Security and Medicare going broke? Not at all. Both programs will still have large flows of revenue, a combined $1.3 trillion in 2015.

What it means is that the new deficits of Social Security and Medicare will be in direct competition with the perpetual deficits of regular government spending — two worlds will collide.